Cameroon: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
01 Jan 1999
eISBN:
9781451808018
Language:
English
Keywords:
ISCR; CR; salary; Cameroon; government; investment; firm; CFA franc; debt overhang; IMF staff estimate; debt-service arrears; year Cameroon; Debt burden; Debt service; Arrears
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This Selected Issues paper and Statistical Appendix highlights that after eight years of decline, economic activity of Cameroon began to pick up following the January 1994 devaluation of the CFA franc, the accompanying upturn in world economic activity, and favorable international commodity prices. Real GDP, which had fallen by an annual average of 4 percent since the mid-1980s, began to recover, with the annual growth rate stabilizing at about 5 percent in the three years to 1997/98. In the policy area, the 1994 devaluation was accompanied by tax and trade reforms.

Abstract

This Selected Issues paper and Statistical Appendix highlights that after eight years of decline, economic activity of Cameroon began to pick up following the January 1994 devaluation of the CFA franc, the accompanying upturn in world economic activity, and favorable international commodity prices. Real GDP, which had fallen by an annual average of 4 percent since the mid-1980s, began to recover, with the annual growth rate stabilizing at about 5 percent in the three years to 1997/98. In the policy area, the 1994 devaluation was accompanied by tax and trade reforms.

V. cameroon’s debt burden: debt overhang and secondary market prices51

94. Cameroon started accumulating external debt in the late 1970s in order to finance major economic development projects, especially in the oil sector. When the country underwent a major economic crisis from 1986 to 1993 following the deterioration of the terms of trade, the authorities resorted to deficit financing through massive foreign borrowing, thereby sharply increasing the debt burden. As a result, there was an accumulation of arrears, a virtual cessation of new lending by international banks, and the appearance of a secondary market of Cameroon’s sovereign debt characterized by sharp discounts. While it has proved difficult to establish empirically the effects of debt overhang on growth, it can be argued that debt overhang generally contributed to the lack of dynamism in the economy. As part of the economic recovery, the authorities have embarked on a process of normalization of relations with creditors, starting with the rescheduling agreement reached with the Paris Club in October 1997, which has been followed by agreements with other bilateral creditors. This year Cameroon expects to conclude an agreement with the London Club and other commercial creditors, that should pave the way, for greater access to international financial markets.

95. This chapter reviews the evolution of Cameroon’s external debt and assesses its impact on economic growth. It draws on Brooks and others (1998), broadening the coverage to include commercial debt issues. For the purpose of this chapter, commercial debt refers to public and publicly guaranteed debt contracted from commercial creditors. The first part of the chapter traces the evolution of Cameroon’s external debt situation. The second part analyses the factors that contributed to the debt overhang, and discusses the effects of excessive borrowing on economic growth. The third part focuses on developments in Cameroon’s secondary market prices of sovereign debt, given the key role that they play in Brady-type debt-and debt-service-restructuring (DDSR) operations.

A. The Evolution of Cameroon’s External Debt Situation

Indicators of Cameroon’s indebtedness52

96. Cameroon’s external debt situation generally remained manageable during the period up to 1986. Although overall debt stocks increased rapidly, at an average of about 29 percent per year, during the period from 1975 to 1986, the impact on the debt burden was mitigated by the strong average growth rates of both real GDP (8 percent per year) and exports (15 percent per year).

Table 15.

Cameroon: Selected External Debt Indicators, 1975-97

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Source: World Bank, Global Development Finance.

Actual debt service in percent of exports of goods and services. Scheduled debt service numbers are not available on a consistent basis.

Nevertheless, the debt-to-GDP ratio increased from 17 percent to 33 percent during this period, while the debt-to-export ratio increased from 66 to 143 percent. Debt service ratios remained moderate, however, averaging 14 percent of goods and services (see Table 15).

97. The turning point came in 1986 with the sharp decline in oil and other commodity export prices. During the period from 1987 to 1997, the debt burden indicators deteriorated very rapidly. Overall, debt stocks grew on average by 17 percent a year, while export growth virtually ceased. As a result, debt-to-export and debt-to-GDP ratios rose from 219 percent and 32 percent in 1987, respectively, to 369 percent and 113 percent in 1997. More important, scheduled debt-service ratios rose dramatically from 20 percent in 1985 to over 60 percent in 1997. These increases put enormous pressure on the economy especially on government finances, at a time when economic performance was very weak,53 leading to an acceleration in the accumulation of debt-service arrears (for all categories of creditors). As a ratio of government revenues, government debt stocks rose from 104 percent in 1986, peaking at 1,135 percent in 1994 (after the CFA franc devaluation) and falling to 618 percent in 1997. By 1996, the country was classified as a heavily indebted poor country (HIPC), with a net present value (NPV) of debt equivalent to 353 percent of exports of goods and services, a scheduled debt-service ratio of 57 percent, and a scheduled ratio of debt service to government revenue of 94 percent.

Figure 15.
Figure 15.

Cameroon: Net Flows on External Debt,1975-97

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A005

Source: World Bank, Global Development Finance.

98. Commercial debt contributed significantly to the growth in the overall debt burden. During the period from 1975 to 1986, the average growth rate of commercial debt was fairly high at 27 percent per year. However, it was unevenly spread, with the early 1980s recording negative growth rates, following the tightening of lending conditions in the aftermath of the international debt crisis. It was during the period 1986-1991 that growth rates of debt accelerated, averaging 18 percent annually. As new borrowing virtually stopped in 1992 (see Figure 15), and trade credits were repaid, the amount and share of commercial debt in total debt declined sharply from a peak of 32 percent in 1988 to 8 percent in 1997. As a result, the concessionality54 of overall debt increased from 27 percent in 1991 to 43 percent in 1997 (see Figure 16).

Table 16.

Cameroon: Structure of Public and Publicly Guaranteed Debt, 1975-97

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Source: World Bank, Global Development Finance

Debt to banks and other commercial creditors (mainly in the form of trade credits). Debt to banks excludes capitalized late interest.

Factors explaining the growth in debt

99. The exploitation of petroleum reserves, following their discovery in 1978, led to a rapid accumulation of commercial debt. Annual long-term disbursements of commercial debt typically ranged from 30 percent to almost 50 percent of total disbursements (see Table 17). The financing of the construction of the national oil refinery (SONARA) and related works contributed significantly to this rapid escalation in debt stocks.

100. The 1978-1985 oil boom encouraged a rapid expansion of the public sector in three ways (see Ghura (1997)): (a) increased outlays in the government capital budget; (b) the creation of a large number of public agencies, marketing boards, and public enterprises, a number of that contracted external loans which were ultimately taken over by the government; and (c) heavy investment in the transport sector by public enterprises (railways, urban transport, air travel, merchant shipping, etc.).

Table 17.

Cameroon: Breakdown of the Changes in the Total Debt Stock, 1976-97

(In millions of US$)

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Sources: World Bank, Global Development Finance, 1997; and IMF staff estimates.

Not available prior to 1985 in GDF; figures for 1981-85 represent 1985 only.

Not available prior to 1989 in GDF; 1986-90 figures represent 1989-90 only.

Staff estimates.

Not available prior to 1982 in GDF; 1981-85 figure reflects changes from end-1982 to end-1985 only.

Figure 16.
Figure 16.

Cameroon: External Debt Indicators, 1975-97

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A005

Source: World Bank, Global Development Finance and staff estimates

101. Overall, the terms of trade during the period 1986-92 fell by about 40 percent. This resulted in: (a) increased recourse to external borrowing—often on commercial terms—especially from banks; and (b) increased accumulation of domestic arrears to government employees and suppliers. The pace of new borrowing exceeded even that of the oil boom period. Most of the new borrowing from foreign banks went into infrastructure projects such as airports and roads.55 A considerable amount also went into bank restructuring.56

102. As international commodity prices did not recover, the economic crisis worsened. Starting in the early 1990s, there was a substantial accumulation of external arrears and banks virtually ceased lending to Cameroon. The country rescheduled five times with the Paris Club (see Table 18), with the last three reschedulings on concessional terms. Increasingly, the country came to rely on concessional multilateral inflows which contributed to almost two-thirds of all new borrowing.57

Table 18.

Cameroon: Overview of Rescheduling of Official Bilateral Debt, 1989-97

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Source: Official Financing for Developing Countries, IMF, 1997 and IMF staff updates.

Includes debt service formally rescheduled as well as deferred maturities.

Concesssional rescheduling with a 50 percent of NPV reduction. Naples terms can go up to a 67 percent reduction although Cameroon only received a 50 percent reduction in 1995 and 1997.

B. Effects of the Excessive Borrowing

Debt overhang

103. The effects of excessive borrowing on economic growth have been examined by, for example, Elbadawi, Ndulu, and Ndung’a (1997). In their study, debt overhang refers to a debt large enough to have adverse consequences for investment and growth because investors, expecting that current and future taxes will be increased to pay for debt service, are discouraged from investing. In other words, there exists a point beyond which debt, instead of stimulating growth, actually retards it. Elbadawi, Ndulu, and Ndung’a (1997). argue that for most sub-Saharan African countries the constraint imposed by the debt overhang on internal resource mobilization for debt servicing is more pronounced than the reduced availability of foreign exchange resources. They find evidence that the debt burden faced by African HIPCs has strongly and negatively affected economic growth. This burden has led to fiscal distress, the main symptoms of which are severely compressed development budgets and a shrinking fiscal base for essential services. This is the case in CFA franc zone countries and in Cameroon (see discussion in Chapter III on fiscal sustainability).

Figure 17.
Figure 17.

Cameroon: Commercial Debt and Concessionality 1975-97

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A005

Source: World Bank, Global Development Finance and IMF staff estimates.

104. Claessens and others (1997) also advance two further arguments why the overall debt burden matters for growth. They argue that: (a) an excessive debt burden can be a disincentive to engage in meaningful reforms if policymakers perceive that foreign creditors will appropriate most of the gains through increased debt service, and (b) that a debt overhang prevents potential local investors from accessing international capital markets by increasing the level of risk associated with uncertainty in the economy. However, most authors do not adequately take into account overall aid flows when making the debt overhang argument. To the extent that the existing debt is not being fully serviced and that there are significant external aid inflows, a case can be made that debt overhang may not be a binding constraint to growth. In particular, it is difficult to reconcile such inflows with the fiscal distress scenario advanced by Elbadawi, Ndulu, and Ndung’u (1997).

105. The case of Cameroon is complex. There is a widespread perception among policymakers in Cameroon that debt overhang has been an impediment to economic recovery. The accumulation of arrears certainly entailed a complete cessation of lending by international banks to the government by 1991 and a sharp reduction in private sector access to international capital markets. It was only after growth prospects improved following the 1994 devaluation that lending by international banks to a few major export-oriented companies picked up, especially to those with close relations with European companies (often subsidiaries), mainly in the form of export credits.

106. Does empirical analysis support the debt overhang argument for Cameroon? In order to answer the question, we followed the methodology advanced by Elbadawi, Ndulu, and Ndung’u (1997). which tries to assess the impact of debt overhang on growth.58 The three key channels through which debt has an impacts on growth in this framework are: (a) current debt inflows which should stimulate growth; (b) past (excessive) debt accumulation, that is, debt overhang, which negatively affects growth; and (c) debt-service obligations, which reduce export earnings and therefore reduce growth. After analyzing the time-series properties of these and other control variables,59 such as the investment/GDP ratio, the real effective exchange rate, inflation, the results showed that none of the three channels had any statistically significant impact on growth.60 While this result is somewhat surprising, it cannot per se lead to the conclusion that the level of debt stocks and flows has no impact on growth in Cameroon. One possibility is that the main determinants of growth are elsewhere (exporters, who are affected mainly by developments in international commodity markets, continued to have access to finance throughout the period)61 and that debt has interacted in more complex ways with the other explanatory variables than assumed in the simple model presented here. For example, debt may have had an impact on growth through tax rates and government capital expenditures.

Secondary Market Prices

107. According to Krugman (1988), a debt overhang occurs in “the presence of an existing ‘inherited’ debt sufficiently large that creditors do not expect with confidence to be fully repaid.” In other words, the expected value of the debt is less than its face value and actually declines beyond a certain point, in a Laffer-curve fashion (see Cohen (1993)). This situation leads to the emergence of a secondary market characterized by discounts on the face value of the debt.

Figure 18.
Figure 18.

Cameroon: Evolution of Secondary Market Prices of Sovereign Debt, August 1988-November 1998

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A005

Source: Salomon Brothers and IMF staff estimates.

The appearance of a secondary market debt characterized by sharp discounts on the face value of debt is an indication that the market views the growth of an economy and, therefore, its repayment prospects, as being insufficient for the full value of the debt to be repaid. Below is an analysis of how the secondary market price of Cameroon’s debt has evolved over the past 11 years, reflecting the evolution of the market’s perceptions of Cameroon.

108. Secondary market prices of sovereign loans are widely used in assessing the potential cost and the efficiency of a debt restructuring when a country undertakes a DDSR operation. Secondary market prices are assumed to reflect the market’s assessment of the underlying asset value, i.e. the expected return on the asset and systemic risk factors. Traditional arbitrage price theory assumes that innovations in economic fundamentals have a significant impact on the price level. However, according to Stone (1990b), a structural model capable of explaining the price generation process does not really exist.

109. Many authors have questioned the reliability of the information content of secondary market prices.62 The sovereign debt market is quite different from other normal securities markets in that it is characterized by a limited number of buyers and sellers, either trading on their own account (mainly traders in New York and London), or for various portfolio realignment and tax purposes (mainly financial institutions)63. Furthermore, there are important non-trading agents such as multilateral institutions and creditor governments who have limited responsiveness to market prices of debt. The most frequent presentation of the determinants of secondary market prices distinguishes two categories of factors: (a) indicators of the economic performance of the debtor, including debt burden indicators; and (b) exogenous factors. The first category consists of those factors over which a country has some control such as domestic inflation, the level of foreign exchange reserve coverage, fiscal performance, the real exchange rate, etc. The second category comprises indicators of the international economic environment such as the evolution of commodity prices, international interest rates and international economic growth. In practice, it is difficult to distinguish between systemic factors and those that affect the expected value of the asset.64

110. Data on secondary market prices can be obtained from various sources.65 These data are available on weekly basis and comprises bid and offer prices. Mid-prices can be calculated as the average of bid and offer prices. In this chapter the analysis focuses on the period from August 1988 to November 1998, using monthly averages of the weekly prices. In the few cases where there were missing observations, simple linear interpolations were used.

111. Movements in Cameroon’s prices for the period 1988-98 can be analyzed by dividing them into four distinct periods (see Figures 18 and 19, and Table 19). The first period, from August 1988 to October 1991, was characterized by a continuous, sharp fall in prices. The mid-price fell from about 73 cents on the dollar to 30 cents, with an average price of about 47 cents and an average spread66 of 2.4 percentage points. The second period, from November 1991 to September 1996, was characterized by stability in the overall price level which averaged about 18 cents on the dollar, with a short-lived rally after the CFA franc devaluation of January 1994. However, during this period the spreads widened significantly to a peak of 7.5 percentage points, or 40 percent of the mid-price. From October 1996 until June 1998, the prices started rising again, averaging 24 cents, with very narrow spreads of about 1.6 percentage points. From July 1998 to November 1998 the fourth period, prices followed a downward spiral to an average 23 cents, within the range of 14-27 cents. The spreads marginally narrowed.

Figure 19.
Figure 19.

Cameroon: Evolution of Spreads, August 1988-November 1998

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A005

Source: Salomon Brothers and IMF staff estimates

112. An attempt was made to model the changes in prices using innovations in key macroeconomic and financial variables, along the lines of the model presented in footnote 15.67 After analyzing the stationarity properties of the variables (all were found to be 1(1)), both attempts to model prices68—using a vector error correction (VEC)—approach and a simple vector autoregression (VAR) proved of limited use as virtually all the variables turned out to be insignificant.69

Table 19.

Cameroon: Descriptive statistics for secondary market prices of sovereign debt, August 1988-November 1991

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Source: Salomon Brothers, and IMF staff estimates

As a percentage of the mid-price.

113. Do these results confirm the skepticism about the information content of secondary market prices for Cameroon? Some authors have found significant links between macroeconomic variables and secondary market prices for emerging markets. For example, Dicks and Singh (1991), using the credit worthiness scoring matrix of the Bank of England, found that macroeconomic factors played a significant role, especially in the largest markets. However, it is well known that some important qualitative information plays a key role in price determination. Where the trading volumes are thin and infrequent, it is unlikely that traders will invest significant resources in looking for information, and, more importantly, keeping it updated;70 they will tend to rely more on informal analysis or merely behave in a “herd’ fashion by following developments in other markets. Stone (1991) shows that using qualitative information on country risk ratings from the Institutional Investor (based on a biannual survey of bankers), one can improve the explanatory power of the equations significantly. The main conclusion of several authors is that the weak relationship between changes in secondary market prices and macroeconomic variables is not a result of illiquidity or inaccurately reported prices. Because sovereign claims are not enforceable, unlike equity contracts, debt prices are quite sensitive to noneconomic variables, such as investor evaluations of political instability and availability of third-party financing. These factors are likely to play a significant role in Cameroon. Unfortunately, there is no credit rating information on Cameroon on a monthly basis to allow the construction of a meaningful explanatory model. The only analysis of the price movements performed here is impressionistic.

114. The first period, from 1988 to 1991, coincided with a rapid deterioration in economic conditions, as witnessed by the decline average in GDP growth of 5.5 percent per year. Debt-service arrears started accumulating very rapidly, and lending by commercial banks dried up during this period. The period of the mid-1990s saw some stabilization of the economic situation, with 1994 marking the turning point. Given Cameroon’s previous track record of frequent interruptions in implementation of Fund programs, it took some time before the markets were convinced that the economic situation had indeed changed for the better. The start of the ESAF-supported program in 1997 confirmed this. Nevertheless, the improvement in prices was quite modest, and was reversed in June 1998 when it became apparent that a rapid DD SR operation with the London Club was unlikely. The deterioration accelerated when the situation of emerging markets became more unstable after the start of the Russian financial crisis in the summer of 1998.

C. Concluding Remarks

115. Cameroon’s heavy accumulation of commercial debt started in the late 1970s in order to finance major economic development projects, especially in the oil sector. The pace slowed in the early 1980s but accelerated when the country underwent a major economic crisis in 1986. Subsequently, as the authorities resorted to deficit financing through massive foreign borrowing, especially from banks. Since this occurred in a context of frequent policy slippages, the accumulation of debt exacerbated the government’s financial problems as export growth and fiscal revenues stagnated. Arrears accumulated rapidly, foreign bank financing dried up, and the price of Cameroon’s debt on the secondary market sharply declined as the market realized that the repayment prospects were dwindling.

116. Although the direct impact of debt overhang on growth is difficult to determine statistically, the weight of debt service on government finances has been considerable. Growth in the main export sectors has been dominated by developments in the international markets and other factors, such as the 1994 devaluation, the high cost of doing business in Cameroon, as shown in Chapter II, is at least in part related to reduced government expenditures on infrastructure maintenance, reflecting the strains of high debt service. More directly, the premiums that lenders charge to finance Cameroonian companies have increased, and it is likely that the impact of the debt overhang has contributed to a lack of dynamism and diversification of economic activity, particularly in the manufacturing sector. Since the Fund-monitored program in 1996/97, there has been an increasing commitment by the authorities to respect debt-service obligations and to normalize relations with all creditors. The forthcoming London Club operation, combined with the 1997 concessional debt rescheduling from the Paris Club, leading to a prospective stock-of-debt operation, should therefore complete the normalization of relations with creditors, reduce the perception of debt overhang, and pave the way for much-needed new foreign investment, especially in the context of the ongoing privatization program.

APPENDIX I: Cameroon: Summary of Tax System

(As of January 1, 1999)

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Sources: Code des Impôts; Loi de Finances; and Customs Code.

APPENDIX II

Table 20.

Cameroon: Gross Domestic Product and Expenditure at Current Prices, 1993/94-1997/98 1/

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Sources: Cameroonian authorities; and staff estimates.

Fiscal year begins in July.

Table 21.

Cameroon: Gross Domestic Product and Expenditure at Constant 1989/90 Prices, 1993/94-1997/98 1/

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Sources: Cameroonian authorities; and staff estimates.

Fiscal year begins in July.

Table 22.

Cameroon: Gross Domestic Product by Sector of Origin at Current Market Prices, 1993/94-1997/98 1/

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Sources: Cameroonian authorities; and staff estimates.

Fiscal year begins in July.

Table 23.

Cameroon: Gross Domestic Product by Sector of Origin at Constant 1989/90 Prices, 1993/94-1997/98 1/

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Sources: Cameroonian authorities; and staff estimates.

Fiscal year begins in July.

Table 24.

Cameroon: Income, Savings, and Net Financial Balances, 1993/94-1997/98 1/

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Sources: Cameroonian authorities; and staff estimates.

Fiscal year begins in July.

Central government current expenditure minus domestic subsidies and transfers minus domestic and foreign interest payments.

Gross disposable national income minus total consumption.

Central government total revenue minus current expenditure and restructuring expenditure.

GDP at market prices minus total consumption.

Table 25.

Cameroon: Production of Principal Food Crops, 1993/94-1997/98 1/

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Source: Cameroonian authorities.

Fiscal year begins in July.

Modern sector.

Includes macabos, taros, cassavas, yams, and sweet potatoes.

Table 26.

Cameroon: Production of Main Cash Commodities, 1993/94-1997/98 1/

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Sources: Cameroonian authorities; and staff estimates.

Fiscal year begins in July.

Table 27.

Cameroon: Industrial Production Index by Type of Activity, 1993/94-1997/98 1/

(Index, 1990/91=100)

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Source: Cameroonian authorities.

Fiscal year begins in July.

Table 28.

Cameroon: Capacity Utilization in the Industrial Sector, 1995/96:Q1-1998/99:Q2 1/

(In percent)

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Source: Cameroonian authorities; and staff estimates.

Capacity utilization defined as the ratio of actual to potential output; fiscal year begins in July.

Calculated on the basis of weights shown in Table 27.